2G spectrum: Upshot of failed auctions and way ahead for telecom sector

The much-hyped auctions for second-generation (2G) mobile phone airwaves earlier this week ended up a spectacular flop, with the government getting less than a quarter of its targeted revenue. The government is partially right when it says that limited policy prescriptions led to the failure.

But its priority seems to be proving the national auditor, courts and telecom regulator wrong, rather than correcting the ills. Here is a look at the consequences of the failed auctions and the way ahead for the sector.

Rescuing the 2G Auctions

The government "intends" to conduct another sale of airwaves before March 2013 to find bidders for unsold spectrum. "If we had stuck to Trai's recommendations, perhaps the results would have been even worse," telecom minister Kapil Sibal said on Friday.

But what was unsaid that day was that the panel of ministers had ignored industry's pleas to reduce the base price to about Rs 7,000 crore, which was double that of the starting price of the 3G auction of 2010. The 3G auctions generated record revenues.

"The reserve price for 2G auctions was very high. If you look at the 3G auction, it started with a reserve price of Rs 3,500 crore and went up to Rs 16,500 crore. That's a wonderful model. But when you start with such a high reserve price like in this 2G auction, people start eliminating themselves out," Sunil Bharti Mittal, chairman of Bharti Airtel, India's largest mobile operator by revenues and customers, told ET recently.

The first step to rescuing the auctions is a significant reduction in reserve price in the four circles where spectrum was unsold — Delhi, Mumbai, Karnataka and Rajasthan. These regions constitute 50% of the base price. Reduction in the price for CDMA airwaves, a "dying technology", according to Sibal, may lead to takers for airwaves in 800 MHz.

A lower base price will also have two advantages: reduced outgo for existing players towards the one-time prospective fee for existing airwaves; it will also be cheaper for the cash-strapped sector to renew licences, as both possibilities are linked to the outcome of the current sale process.

The price of CDMA airwaves, which was cut to 1.3 times that of GSM, can be set at half the price of 1800 MHz as this technology has weaker ecosystem and poorer quality of customers due to legacy issues. This will encourage bids for the 800 MHz, especially for data services, as this is seen as a far cheaper alternative to 3G spectrum.

For GSM, industry executives say, the base price of Delhi and Mumbai can be halved to encourage bids. Tamil Nadu contributes more revenues to the sector than Delhi or Mumbai and the base price in that circle is half that of top two metros. Spectrum in each circle is sold separately and reduction in these regions will not draw government into a legal tangle.

"We believe the government will likely reduce the reserve price in circles where there was not even a single bid. There will be limited demand for 900 MHz coming up for renewal at a price two times the winning price of this auction," Goldman Sachs equity research said in a report on November 15.

Price for Future Auctions

The debacle presents the government an opportunity to cut the base price for upcoming auctions in other bands recommended by Trai, beginning with the 900 MHz frequencies that is due to be sold in early 2013. Trai had said the reserve price for 900 MHz be fixed at double that of the recently concluded sale. It has also prescribed an astronomical base price of Rs 72,240 crore for 5 MHz of airwaves in the 700 MHz auction scheduled for 2014-15.

Research firm Nomura said the muted response to the 2G auction presents an opportunity for Trai and the government to work together to make effective policies, adding that fixing reserve price was crucial as licence renewals will begin soon and additional airwaves must be released for 4G.

The lower reserve price during reallocation of the 900 MHz band (refarming) next year will lead to active participation by mobile phone companies as these frequencies can be used for 3G offerings in the future.

Benchmark for Other Resources?

Could the spectrum auction model be replicated for selling other natural resources? Unlikely. But the government can learn from this auction and let the market discover the price of a natural resource on its own, say analysts.

The Supreme Court, when responding to the presidential reference on licence cancellation, said, "Auctions are not the only permissible method for disposal of all natural resources across all sectors and in all circumstances." The auction debacle also proved that institutional overreach can prove disastrous and that corruption scandals cannot be corrected through limiting policy prescriptions.